Shared Services Leaders Come on Down...and Spin the Pricing Model Wheel

Just like in the famous game show "The Price is Right," shared services organizations sometimes find themselves trying to come as close to $1.00 per transaction without going over. Leaders may ponder how a box of A/P disbursement Rice-A-Roni sells for $5.00 on air; however it varies from $1.75 to $7.75 from one Shared Services Center to another. How do you play the Grocery Game in Shared Services and determine the right price for your services without exceeding budget? Traditional Shared Services models operate like a business in which a pricing model is developed to determine the rates and methods to capture costs and charge out for services. Pricing models can be designed to align with business objectives, shape customer focus and in some cases drive customer behavior and influence process quality. Pricing models are a tool to provide transparency for cost drivers and enable customers to exercise some control over their Shared Services spend. Below are four examples of Shared Services pricing models: Cost Per Transaction - Costs are calculated based on the type of transaction being processed and charged based on volumes executed or consumed. The models supports costs being higher for more complex or knowledge based transactions. 100% Allocation - This model is common in public sector, defense and some industries with specified regulatory requirements related to the services provided by the Shared Services Center. In this model 100% of all costs and any profits (based on a specified budget or actual expenses) must be fully allocated. This model also requires the return or allocation of monies received such as rebates, travel and procurement card incentives, and tax refunds to the end customer. Cost Plus Investment or Incentive – A key benefit of this model is the ability to reinvest profits into the shared services operations. One global transportation systems company uses this model to fund their Shared Services IT and large scale process improvement projects. Cost plus incentive rewards the Shared Services organization for exceeding goals, helping the company to save time, money or resources, and the incentive can be returned in the form of lower shared services costs going forward. Profit – This model is less common and is similar to how business segments are measured based on profits or losses from services and operations. The model allows the shared services organization to charge more for their services than the full cost of service execution. A bonus component of several pricing models is a direct correlation to quality. While this may add complexity to the model, it’s often essential for driving behaviour that contributes to more effective service delivery. As an example, Business Unit A routinely submits its A/P payments for processing with invalid or missing Purchase Orders (PO) and contributes to a high rate of rework from matched exceptions resulting from closed or inadequately funded PO’s. While Business Unit B has a 98% three-way PO to invoice match rate and proactively corrects any variances prior to submission. Adding a quality input measure or incentive can help to drive the desired behaviour from Business Unit A if they have to pay a higher cost for the same transaction due to poor quality inputs. Pricing strategies and the related models used can vary over time in order to align with the current strategic objectives of the organization and often mature along with the shared services organization. The successful model aligns both customers (buyers) and service provider (suppliers) objectives to reach mutually-beneficial goals and pricing structures. Using an example from a North American headquartered company operating in an Aerospace and Defense industry this discussion will focus on a combination of the 100% allocation and cost per transaction model. This organization shared that the pricing model used during the early years of their shared services maturity was based on total volume divided by total service cost by service area. With this model each business unit paid the same price per transaction regardless of how complex or streamlined the unit’s operations may have been. The objective was to create awareness and help the internal customers become comfortable with charges for services which they viewed as being free prior to the Shared Services structure being implemented. The team evaluated various pricing options with the goal of designing a model that wouldn’t be too complex or resource intensive. The organization elected to go with a cost per transaction model with some key variations. In their industry strict regulations govern the pricing for the defense contracting portion of their business and require 100% allocation of all costs. This added to the challenge of ensuring costs were estimated appropriately and budgets set accurately to avoid surprises or unplanned adjustments. The team utilized external benchmark data as an input when developing the initial transaction pricing. To calculate the cost per transaction the organization would: Charge by transaction type (e.g. Evaluated Receipts Settlement (ERS), Electronic Invoice, Procurement Card, Paper Purchase Order (PO), Non-PO disbursement) Include all activities and overhead (e.g. facilities, management, process, project and quality teams, IT, etc.) The objectives in moving to this new pricing model were clearly defined: Incentive to Change Behavior (changing vendor from a paper PO to ERS is a significant cost reduction) Visibility Drives Value (partnering reduces costs and creates value) End-to-End Process View Benchmarking and Goal Setting (external validation combined with process improvement targets) The organization’s model developed over time as the shared services center matured, added new services and the concept of shared services became more widely accepted across the enterprise. What is your biggest challenge when spinning the Pricing Model is Right wheel? The key is to construct a fair and meaningful model which can be effectively implemented and easily understood. By doing this, you can be a double showcase winner! For additional resources and information, please access these references: Everest Group Study: Building a Transaction-Based Pricing for Outsourced F&A and Procurement Operations (link to Everest Group.doc) StratFrom: Choosing the Right Pricing Model (link to StratForm doc) Register to join the Coca-Cola Refreshments Finance Shared Services site tour during the 2014 North America Shared Services Week in Orlando on March 11-15 to learn how the finance and accounting services center with a diverse portfolio charges for its services. [inlinead]

Shared Services Leaders Come on Down...and Spin the Pricing Model Wheel

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